Agriculture Reference
In-Depth Information
social benefits (costs), which are difficult to measure. This problem notwith-
standing, we attempt to assess the PFDS's performance in terms ensuring price
stability, implementing food security and antipoverty programs, and managing
natural disasters and other income shocks.
Enforcing Floor and Ceiling Prices
The rationale for PFDS reform, instrumented through donor conditionalities
during the late 1980s and early 1990s, acknowledged the need for price stabi-
lization by establishing effective and enforceable floor prices for rice and wheat.
The reform helped to sustain growth of agricultural production and boost rural
income; at the same time, it emphasized measures to support increased food se-
curity and stable supplies of food grains to consumers (Asian Development
Bank and World Bank 1990). Price stabilization, therefore, has two interrelated,
ostensibly conflicting goals: ensuring a floor price for producers and a ceiling
price for consumers.
The floor price is intended to provide incentives to producers, reduce price
risks, and ensure farm income to producers (Ahmed, Chowdhury, and Ahmed
1993). The effectiveness of procurement is a necessary condition to encourage
farming and stimulate production. Reducing price risks is a related form of
incentive to producers. Farmers' production decisions are contingent on their
expectation of the price levels after harvest. Providing farm income to small
producers is a related objective. It is based on the premise that small farmers
generally sell immediately after harvest to meet various family needs and to pay
for debt. It follows, therefore, that if the procurement price is set at a level higher
than the prevailing market price (allowing for some eventual seasonal price
rise), small farmers benefit. This type of reasoning is challenged on the ground
that small farmers in particular and all farmers in general do not sell directly to
government procurement centers. The intermediaries, approved grain dealers
or others, reap the full benefit.
Research carried out during the past decade has questioned the efficacy of
price stabilization and concluded that it cannot be defended on economic
grounds (Goletti 2000). However, the political imperative of price stabilization
through the PFDS mechanism cannot be doubted. Dorosh and Shahabuddin
(1999) have recognized that price stabilization is an important, but somewhat
ambiguous, policy objective of the government, because procurement price and
open-market sale (OMS) prices are not, respectively, true floor and ceiling
prices. In other words, there has been no attempt to buy all foodgrain offered at
the procurement price, and the sale of grain at the OMS price is limited.
It is not possible to establish conclusively that floor prices for foodgrain
producers are ensured through the public procurement system. This impression
is further reinforced by the farm-level data relating to price of paddy (unhusked
rice) and the quantity procured of major rice crops. Table 5.3 provides evidence
that quantity procured has been relatively small in relation to total production
